The Hindu Business Line : External borrowings melt down to $4 b for June quarter

Chennai, July 25 Borrowing abroad doesn’t seem to be that attractive now for Indian companies. Data released by the Reserve Bank of India show that there has been a steep drop in the number of companies borrowing abroad as well as the amounts they borrowed outside during the first quarter of this fiscal.

Eighty eight companies have borrowed nearly $4 billion (or about the equivalent of Rs 16,000 crore) through external commercial borrowings (ECBs) during April-June 2008. In the corresponding quarter of the previous fiscal, 195 companies had borrowed $8.5 billion abroad. And for the full fiscal, the amount borrowed abroad was about $31 billion.

Asked about the reasons for the drop in external commercial borrowings, Mr V. Krishnaswamy, General Manager, Indian Overseas Bank, said, “Companies are probably prepaying some of their borrowings. Earlier there was a penalty for such prepayment but that has now been lifted. Secondly, with six month LIBOR (London Inter-bank offered rate — the benchmark rate for external borrowings) at about 3.4 per cent and a maximum spread of about 3.5 per cent over LIBOR for ECBs beyond 3 years, the borrowing cost is nearly 7 per cent.

“If one also buys protection to cover the forex exposure, (say, by taking a six month forward cover that is available at 5 per cent), it takes the cost of ECB to over 12 per cent for a triple A rated company. Comparatively, the same company may be able to borrow at between 10.5 per cent and 11 per cent in the domestic market.”

Credit spreads

A foreign banker disagreed slightly with this view, maintaining that it was still cheaper to borrow abroad by at least about one percentage point.

He said that credit spreads had widened in the international market, and that it would be very difficult for many Indian companies to borrow at anything less than 4 per cent over LIBOR. That’s probably one of the reasons why there has been a drop in the ECBs, he reasoned.

RBI data show that Reliance Communication was the main borrower in the current fiscal. Its external borrowings accounted for a little over a quarter of the total external borrowings of all companies in this period. In the month of June alone, Reliance Communications had borrowed $750 million under the approval route, for import of capital goods. The borrowing was for a period of 10 years.

Related Stories:
Borrowing more abroad
External debt up 30%
ECB inflow slows down in April-May
Borrowing overseas is not attractive enough for cos

More Stories on : Overseas Borrowings | Forex

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